Calculate the annualized forfeiture rate for stock-based compensation (ASC 718) to accurately estimate compensation expense.
Total unvested options or RSUs at the start of the year.
New grants issued to employees during the period.
Awards cancelled due to employee termination before vesting.
Total Awards Considered:–
Retention Rate:–
Calculated Forfeiture Rate
0.00%
function calculateForfeiture() {
// Get inputs using var
var unvestedBegin = parseFloat(document.getElementById('unvestedBegin').value);
var awardsGranted = parseFloat(document.getElementById('awardsGranted').value);
var awardsForfeited = parseFloat(document.getElementById('awardsForfeited').value);
var resultsBox = document.getElementById('resultsBox');
// Basic Validation
if (isNaN(unvestedBegin) || isNaN(awardsGranted) || isNaN(awardsForfeited)) {
alert("Please enter valid numeric values for all fields.");
resultsBox.style.display = "none";
return;
}
if (unvestedBegin < 0 || awardsGranted < 0 || awardsForfeited totalPool) {
alert("Forfeited awards cannot exceed the total awards (Unvested + Granted).");
resultsBox.style.display = "none";
return;
}
if (totalPool === 0) {
alert("Total awards cannot be zero.");
resultsBox.style.display = "none";
return;
}
// Calculation Logic
// Forfeiture Rate = Forfeited / (Unvested Start + Granted)
var rateDecimal = awardsForfeited / totalPool;
var ratePercentage = rateDecimal * 100;
var retentionPercentage = 100 – ratePercentage;
// Display Results
document.getElementById('totalAwards').innerText = totalPool.toLocaleString();
document.getElementById('retentionRate').innerText = retentionPercentage.toFixed(2) + "%";
document.getElementById('forfeitureResult').innerText = ratePercentage.toFixed(2) + "%";
// Show results box
resultsBox.style.display = "block";
}
Understanding Forfeiture Rate in Stock Compensation
The Forfeiture Rate is a critical metric used in the accounting for stock-based compensation (such as Employee Stock Options and Restricted Stock Units). Under accounting standards like ASC 718 (formerly FAS 123R), companies are required to estimate the number of awards that will not vest due to employee termination.
Accurately calculating this rate allows companies to recognize compensation expense only for those awards that are expected to vest, rather than booking the full expense upfront and reversing it later.
The Calculation Formula
While there are complex dynamic models for calculating forfeiture, the static calculation method is the most commonly used for basic estimations. The formula is:
Unvested Awards at Start: The count of outstanding options or RSUs that had not yet vested at the beginning of the reporting period.
Awards Granted: New stock awards issued during the period.
Awards Forfeited: Awards cancelled because the employee left the company before the vesting date.
Why It Matters
1. Expense Accuracy: Companies must recognize the expense of stock options on their income statement. By applying a forfeiture rate, the company reduces the reported expense, improving net income in the near term by excluding awards that employees will never actually earn.
2. True-Ups: If the estimated forfeiture rate differs from the actual rate, companies must perform a "true-up" adjustment. If the actual forfeiture rate is higher than estimated, the company will reverse previously booked expenses. If it is lower, they must book additional expenses.
Example Calculation
Consider a technology startup with the following data for the fiscal year:
Unvested Options (Jan 1): 100,000
New Options Granted: 20,000
Options Forfeited (Employees quit): 6,000
The total pool of awards exposed to forfeiture risk is 100,000 + 20,000 = 120,000.
The calculation is 6,000 / 120,000 = 5.00%.
This means the company can anticipate that roughly 5% of its stock compensation expense will not be realized, reducing the accounting burden for that period.